Final Exam Review Econ 201

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economics

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is concerned with unlimited wants, concerned with limited resources, and is a social science

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rational self interest means

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pursuing what makes you better off

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underlying economic theory is the idea that

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choices are affected by both positive and negative incentives

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ceteris paribus means

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other things being equal

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economic models

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are simplified representations of the real world

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the presidents statement that "to encourage economic growth, taxes should be cut"

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normative statement

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if an increase in one variable causes a decrease in another variable there is

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an inverse relationship

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scarcity by definition means

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a situations where the inputs for producing the things we desires are insufficient to satisfy all of our wants

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opportunity cost is best defined as

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the next highest valued alternative when a choice is made

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the bowed shape of the traditional production possibilities curve reflects the

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fact that not all resources are equally well suited to producing all goods

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growth of the productions possibilities curve PPC is illustrated by a

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rightward shift of the PPC

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to have more consumer goods in the future, we

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must produce more capital goods today

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comparative advantage is the ability to

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perform an activity at a lower opportunity cost

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mexican avocado growers produce cheaper than americans. this will not reduce total jobs available in US. the logic underlying the argument is that

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american ex avocado growers will switch to specializing in a crop in which they hold the comparative advantage

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in economics, international trade is based on the existence of

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comparative advantage between countries

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in the simple circular flow model, total income in the US must equal

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a yearly amount earned by our nations resources,
wages + rents + interest + profits
the total monetary value of all final goods and services

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the circular flow model shows that the consumer goods and services produced by businesses are sold through

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the output market

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which of the following would be sold in an output market?
stocks and bonds
entrepreneurial ability
a new car
iron ore

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a new car

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profits are

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rewards to entrepreneurs

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resources can be purchased

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in the input markets

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households receive their income in the circular flow diagram by

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selling the use of whatever resources they own

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when mcdonalds runs a special for hamburgers reducing the price of big macs to 99 cents with all other factors constant

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there is likely to be a decrease in demand for whoppers

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which factor would cause a movement along the demand curve for pizza?

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a drop in the price of pizza

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which of the following will cause the demand curve for cable tv to shift left

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the cancellation of the hit series, the sopranos


compliment
no sopranos, less watching cable

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if a good is a normal good, an increase in income will

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increase the demand for the good

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if a good is an inferior good, an increase income will

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decrease the demand for the good

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if the price of milk falls, the supply of icecream

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increase


price down
demand down
supply up

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which of the following will not affect the supply of cars

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price level increase

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the supply curve will shift to the left when

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a producer leaves the industry

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what would happen if increase supply of expresso coffee makers?

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the expectation that price of expresso makers will fall in the future

increase supply
price falls

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if the demand for a product rises and supply stays the same

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both equilibrium price and quantity will rise

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a shortage occurs when

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the quantity demanded is greater than the quantity supplied at a price below equilibrium

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what happens as the result of shortage?

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there is an upward pressure on prices

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when supply decreases and at the same time demand increases we

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cannot predict equilibrium quantity, but we know that equilibrium price will increase

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a ticket costs 80 and there are 6000 fans wanting to attend but only 4000 ticket available.

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the equilibrium price of tickets if more than 80

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in which of the following situations will both equilibrium price and equilibrium quantity increase

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an increase in demand with no change in supply

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if demand and supply both increase

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equilibrium quantity will increase but the change in equilibrium price can not be determined without further information

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if demand decreases and supply increases

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equilibrium price will decrease but the change in equilibrium quantity cannot be determined without further info

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which one of the following could account for an increase in the price of dvd players

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an increase in demand aloong with a decrease in supply

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what would happen in the market for bread if the demand increased but the price was not permitted to change

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shortage

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price floor represents

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a minimum price that can be legally charged for a good or service

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individuals who have stopped looking for work because they are convinced that they will not find a job are called

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discouraged workers

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if the US economy enters a recessionary phase, the

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unemployment rate will increase

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suppose that matt quits his job with the corporation in order to look for more rewarding employment. this is called

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frictional unemployment

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unemployment caused by recessions is called

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cyclical unemployment

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full employment is not zero unemployment because

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there are normal friction in the economy made up of those workers who are between jobs and those new entrants to the labor force

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inflation in its purest sense is a situation in which

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the average of all prices experiences a sustained rise over a period of time

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the value of your money income in terms of buying goods and services is referred to as your moneys

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purchasing power

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the formula for computing a basic price index is

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(cost of market basket today/ cost of market basket in base year) x 100

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assume 10 percent increase in the price of all goods in 2007; if the base year is 2006 then the price index in 2007 will be

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110

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base year of cost of market basket

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set to 100

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in computing price index

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the quantities in the market basket stay the same while prices differ

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market basket

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a fixed list of items used specifically to track the progress of inflation in an economy or specific market.

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CPI

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consumer price index

statistical measure of weighted average of prices of a specified set of goods and services purchased by typical consumers in urban areas


a typical consumer of the market basket used to calculate the index

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robert received a 100 dollar gift certificate to a bookstore a year ago. the economy has been in a inflationary period for the last year. the gift certificate

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expressed in nominal terms and is worth less

purchasing power changed, not corrected for inflation

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nominal versus real values

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In economics, nominal values are values expressed in terms of units of a currency which may itself change in purchasing power over time, whereas real values have been corrected for inflation.

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gdp deflator is a

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price index measuring the changes in prices of all new goods and services produced in the economy

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criticism of the cpi

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cpi does not account for the way consumer substitute less expensive items for higher priced items

cpi ignores successful new products until long after they have been introduced

cpi ignores changes in consumption patterns that occur between years in which it revises the index

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a recession may be defined as

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a period during which the rate of growth of business activity is consistently less than its long term trend, or is negative

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during year 2006: consumption expenditures = 4000
gross private investment =1300
government expenditures= 2000
exports=900
imports=1100
expenditure approach what is gdp

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4000+ 1300+ 2000+ (900-1100)
=7100

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which of the following spending components makes up the largest percentage of GDP?

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consumption expenditures
(house hold sector 70.5%)




others
government sector
purchase goods/service 20.1%

business sector
gross private investment 14.3 %

foreign sector
4.9%

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durable consumer goods include all of the following except

an automobile
computer
stock in IBM
compact disc player

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stock IBM

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depreciation is

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the reduction in the value of capital goods due to physical wear and tear

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adjusting nominal gross domestic product for price changes from a base year yields

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real gdp

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economic growth is usually defined as

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the increase in output over time, as measured in real per capita gdp

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a country has had its per capita real gdp remain constant for several years. during this period this country

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may have experienced economic growth if the average hours worked per week have fallen

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supose per capita real gdp grows by 3.5 percent per year. based on the rule 70 approximately how many years will it take for the level of per capita real gdp to double?

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70/3.5= 20

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supply side inflation is caused by

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a decrease in aggregate supply and no change in aggregate demand

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when the price level below the level at which the aggregate demand curve crosses the longrun supply curve

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actual real gdp would be less then total planned expenditures and the price level will rise

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the intersection of aggregate demand and longrun aggregate supply identify the price level at which total planned

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real expenditures equal total planned production

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the idea that supply creates its own demand is known at

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say's law

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in the classical model, an increase in AD will cause

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an increase in price level

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classical economists assumed that

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no money illusion
wages flexible
prices elastic

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given the assumptions of the classical model

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the market is a self correcting mechanism

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a decrease in AD will cause

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prices to fall according to to classical economists and unemployment to increase according to keynes

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the simple keynesian model assumes that

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prices especially the prices of wages are sticky downward

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according to keynes involuntary unemployment is possible because of

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long term labor contracts and the existence of labor unions

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the rate of unemployment is calculated as the number of

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unemployed divided by number of people in civilian labor force (employed plus unemployed)

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when an individual is frictionally unemployed, the unemployment arises from

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imperfect labor market information which requires individuals to search for appropriate employment

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enviromential regulation reduces the demand for west virginia coal and the unemployment rate in west virginia increases. this is an example of

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structural unemployment, mismatch between sufficiently skilled workers seeking employment and demand in labor market

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the natural rate of unemployment

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the level of unemployment that is equal to the frictional and structural rate in the long run is sometimes referred to as

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the greater the inflation rate the

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faster the decrease in the purchasing power of money

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the year that is chosen as a point in reference for comparison of prices in other years is known as the

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base year

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the consumer price index attempts to measure

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the level of prices with respect to goods and services purchased by a typical consumer in urban areas

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the gdp deflator is

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the most general indicator of inflation since it measures changes in the prices of all goods and services in the economy

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which of the followung would most likely be defined as a final good or service

wheat
lumber
personal computer
iron ore

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personal computer

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which of the following is an example of the gross private domestic investment component of gdp

you buy share of GM stock
put money in your checking account
put money into savings account
gm buys new drill press

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GM buys a new drill press

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according to keynes the primary determinant of a persons saving is

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the level of the persons real current income

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the relationship between planned real consumption expenditures of households and their current level of real disposable income is

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the consumption function

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real disposable income

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Real disposable income is GDP after tax deflated by price index or CPI.

real disposible income= real gdp- net taxes (or after real tax income

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at a level of real disposable income of 0, consumption is 4000. then

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saving= -$4000

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autonomous consumption

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term used to describe consumption expenditure that occurs when income levels are zero.

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the marginal propensity to consume is .7 there is 1000 increase in autonomous consumption. real gdp will be increased by

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1-.7=.3

1000 x (1/.3) = 3333

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the larger the marginal propensity to consume

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the larger the multiplier is

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keynes believed that the way to prevent recessions and depressions was to

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increase aggregate demand through expansionary fiscal policy

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fiscal policy can include all of the following except

policies that influence AD
changing government spending
changing taxes
policies that influence aggregate supply

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policies that influence aggregate supply

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an example of automatic stabilizer is

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the progressive tax system